Banking, Compliance, Tax Residency & Dubai's Expo 2020
Marios S. Kalochoritis, Managing Partner & Founder, Loggerhead Partners, Dubai, UAE
Taxlinked (TL): How has the current push for greater transparency and the numerous new compliance requirements in the tax and banking world impacted HNWIs and entrepreneurs throughout the globe?
Marios S. Kalochoritis (MSK): Today’s world is more connected than ever. People travel and relocate across countries constantly, either to study, work or live. Talent mobility, economic expansion and foreign investment thrive as a result of this flexibility. There are several of us that end up spending more time in a certain country, other than the country that we are citizens of. And paying taxes to a country that we don’t really call home! This is especially true for people of a certain socioeconomic status and entrepreneurs that, as a general rule, have interests in multiple countries and need to travel extensively as a result. We now must think about our citizenship, residency, fiscal residency and count “days of stay” in a specific country. Complicated!
Even though it is imperative that countries perform their individual compliance checks and apply their tax laws effectively, CRS and the widespread push for worldwide transparency raises questions on privacy of data and security. Different countries themselves have different confidentiality cultures and mechanisms of analysing such intimate financial information and, in some cases, a corrupt political system.
TL: What other changes to the banking and tax landscape have affected the way wealth is managed these days? What do you foresee for the future of wealth management?
MSK: A major shift that has drastically affected this environment is the constantly changing tax and regulatory regimes and their inconsistency across countries. It has become a burden for both banks and clients to keep compliant with these changes. The regulatory environment, now more than ever, affects not only how wealth is managed but also how wealth is efficiently passed on to the next generation. And more recently we all have to deal with negative interest rates!
Although I consider digitalization and fintech companies to be a very welcoming development in the streamlining and efficiency of the banking system, I also observe that they take away from the “private” and “client-centric” character found in the traditional private banking, both key components of wealth management. I expect this and the shift from wealth creation to wealth preservation to be topics of major focus in the near future. We already see wealth preservation to be trending up in Asia, a powerhouse of global first-generation wealth creators.
TL: What are some of the main benefits or advantages of tax optimization and wealth preservation for families and family business succession?
MSK: To start off, family wealth and family interactions are complicated and sensitive affairs. Even though family values and respect is key, the more technical aspects of an efficient family business succession should become a priority.
Founders and owners of family businesses owe it to their successors to ensure that the wealth they have created is protected and passed on to the next generation intact. Also, they owe it to themselves to ensure they maintain their standard of living until the end. This is where tax planning and tax optimization come in.
Shifting fiscal residency, trusts, foundations and fund structures are all tools available. It is proven that people who do not have a proper wealth plan in place usually face a significant reduction in wealth eroded by all sorts of taxes, probate fees and other administration costs.
TL: How has the UAE positioned itself as a desirable destination for investment and wealth preservation?
MSK: Despite its young age, the UAE has set out to become a world-class country and a hub for business and wealthy individuals. The drive and vision of the country’s leadership along with their unique political structure have made swift decision making, effective resource allocation and the development of ambitious projects possible. In the UAE, everything from bank mergers, M&A activity, and dispute resolutions to new business creation is happening fast and with efficiency. The leaders understand that uncertainty is bad for business and they do their best to keep that to a minimum.
What is more important to me is that they managed to achieve all that while maintaining their competitiveness as a country and preserving their unique tax regime of 0% corporate tax, 0% personal income tax and 0% inheritance tax. This itself positions the UAE as a desirable destination for investment, wealth structuring and preservation.
TL: What are some of the pluses and minuses of both citizenship and fiscal residency? When is one preferable to the other?
MSK: First, let me clarify the difference between citizenship and fiscal residency. Citizenship is the country that issues your passport and it can be granted to you, if not by birth, then via marriage, naturalization, investment, et cetera, as long as you comply with some legal formalities. Fiscal residency, on the other hand, is the country to which you are called to pay your taxes. The fiscal residency is what we often call our tax residency. To be fiscal resident of a country you have to meet certain criteria (often unique to that specific country) and ‘substantiate’ that indeed you live in this country, and this is where you should be paying your taxes.
Undoubtedly, a second citizenship makes your life so much easier. For many families, holding a second passport means protection against political and social conflicts, as well as a ‘ticket’ for visa-free travelling. This would otherwise be a very difficult thing to do on a frequent basis, logistically and economically speaking.
Having said that, no matter how smooth a second passport makes your travel logistics, it will never solve your tax issue. That is because, when it comes to paying taxes, your fiscal residency is all that matters.
TL: What are your personal and business expectations for Expo 2020, Dubai’s world expo kicking off in October 2020?
MSK: Expo 2020 is the first ever World Expo to be held in the Middle East, Africa and South Asia region. You immediately understand from this alone that the Expo is a big deal for Dubai and the UAE. It gives the city a unique opportunity to present itself to the world and put itself on the map. It is really a big deal and my team and I are anxiously waiting for it.
This publicity and the increased visitor traffic from all over the world will create economic activity, business connections and opportunities. It will also allow visitors to experience the UAE and how this unique country pursues and offers itself for opportunities and is a serious player on the world stage.
I am thrilled to live this experience first-hand as I am sure Dubai will organize an awesome event. It will certainly be an exciting 6 months.
TL: Is there anything else you would like to share with our network?
MSK: I would recommend that financial advisors and tax planners look at the UAE and explore how they can utilize it to benefit themselves and their clients.